Question

Calla Company produces skateboards that sell for $62 per unit. The company currently has the capacity to produce 90,000 skateboards per year, but is selling 80,700 skateboards per year. Annual costs for 80,700 skateboards follow.

Direct materials	$	855,420
Direct labor		653,670
Overhead		946,000
Selling expenses		543,000
Administrative expenses		474,000
Total costs and expenses	$	3,472,090

A new retail store has offered to buy 9,300 of its skateboards for $57 per unit. The store is in a different market from Calla's regular customers and would not affect regular sales. A study of its costs in anticipation of this additional business reveals the following:

•		Direct materials and direct labor are 100% variable.
•		30 percent of overhead is fixed at any production level from 80,700 units to 90,000 units; the remaining 70% of annual overhead costs are variable with respect to volume.
•		Selling expenses are 60% variable with respect to number of units sold, and the other 40% of selling expenses are fixed.
•		There will be an additional $2 per unit selling expense for this order.
•		Administrative expenses would increase by a $960 fixed amount.

Required:

Prepare a three-column comparative income statement that reports the following:

a.	Annual income without the special order.
b.	Annual income from the special order.
c.	Combined annual income from normal business and the new business.
(Do not round your intermediate calculation round your cost and expenses values to nearest whole decimal places.)

CALLA COMPANY COMPARATIVE INCOME STATEMENTS Normal Volume Additional Volume Combined Total Sales Costs and expenses: Direct materials Direct labor Overhead Selling expenses Administrative expenses Total costs and expenses Operating income

Answer 1

CALLA COMPANY
COMPARATIVE INCOME STATEMENTS
	Normal Volume	Additional Volume	Combined Total
Sales	5,003,400	530,100	5,533,500
Costs and expenses:
Direct materials	855,420	98,580	954,000
Direct labor	653,670	75,330	729,000
Overhead	946,000	76,313	1,022,313
Selling expenses	543,000	56,146	599,146
Administrative expenses	474,000	960	474,960
Total costs and expenses	3,472,090	307,329	3,779,419
Operating income	1,531,310	222,771	1,754,081
Workings:
	Additional Volume
Sales	530,100	=9300*57
Costs and expenses:
Direct materials	98,580	=855420/80700*9300
Direct labor	75,330	=653670/80700*9300
Overhead	76,313	=(946000*70%)/80700*9300
Selling expenses	56,146	=((543000*60%)/80700*9300)+(9300*2)